Is Ohio’s proposed severance tax rate increase fair?

Ohio’s Governor John Kasich’s proposal to raise the state’s severance tax against the oil and gas industry 4 percent over the next three years is stalled at the Statehouse amidst heated debate between industry critics and those who support the oil and gas industry.

I’ve recently read articles and opinions on both sides of the spectrum and honestly, feel like I’m missing something to see the whole perspective correctly. Before we break down the two views here, understand the current severance tax rates in the state and what is proposed.

Severance taxes are collected based on extraction of natural resources from Ohio soil or water. Currently oil and gas producers pay $.03 per MCF of natural gas and $.20 per BBL of oil (which is currently around 1 percent).

Kasich’s proposal is to slowly raise the severance tax rate to 4 percent over the next three years – bringing in an estimated $973 million to be used for income tax cuts statewide.

Ohio Oil & Gas Industry view:

The Ohio Oil & Gas Association immediately came out swinging against the proposal when Kasich announced it, countering that it will make for a bad business climate in the state and drive away potential investors that could boost the state’s drilling in newly-discovered Utica shale.

The Association also released a fact sheet about Ohio severance taxes and included this chart comparing the severance taxes of four surrounding states to Ohio. You can see that Ohio falls in the middle in regards to the percentage or amount that producers have to pay based on the minerals extracted.According to OOGA’s fact sheet, both West Virginia and Michigan, who have higher severance tax rates, have seen decreased oil and gas investment and drilling in the past five years since, while Pennsylvania, which has no severance taxes and only an impact fee for drilling, has seen a 600 percent increase in drilling.

OOGA also counters that in 2008 Arkansas implemented a similar increase in state severance taxes and has since seen drilling activity decline by 50 percent.

While the Governor claims that the industry doesn’t pay enough in taxes and that this tax increase will boost the economy – the industry adamantly claims that’s not the case.

Because the Utica shale is in its infancy, it will take several years to determine the viability of the formation, said the Association. If the cost of doing business becomes too high before enough investors can invest in the new shale play, they will take their investments somewhere else.

The Governor’s view:

Kasich – who’s largely known for his ability to cut budget and close deficits – has proposed a fairly modest increase in the severance tax if you look at Texas and Oklahoma, which both have a 7 percent or higher rate, and Michigan and Pennsylvania, which both have 5 percent or higher.

At an Ohio Energy Jobs Summit a few weeks ago Kasich was quoted by the Associated Press as saying, “I don’t want all this money to escape Ohio. And our severance tax is going to be at a level that will allow us to be very competitive and it will allow us to reduce our income tax in the state and benefit all families.’’

This is how Kasich’s website describes the tax: “As Ohio oil and gas production increases, so will the income tax cut for Ohioans. Every cent – 100 percent – of new tax revenue from the high-volume horizontal wells like those used in Ohio’s Utica and Marcellus shale formations will be used to reduce income taxes the following year.”

From this perspective, it looks like it will only apply to new wells drilling with a horizontal well – which won’t affect smaller producers across the state that only use vertical wells when drilling. And from this quote – of him putting what he says the tax into perspective – it also seems like a fair tax he’s proposing:

“This is what the oil companies in Ohio are paying in tax on a $107 barrel of oil — 20 cents. I’m not kidding you. Do you understand what I just told you? This is what they pay for taking oil out of our ground and selling it to you, by the way, for $4.30 a gallon,” Kasich said.

My problem with hearing Kasich’s side of the story is that I seem to be missing where the truth lies. I understand that with extreme views you have to take them with a grain of salt. What I would like to hear from the Ohio producers is how this proposed severance tax will really affect you. Reading about it on paper it may not look so bad – but when you see how it works with real numbers, real wells, real lives, it can be a different story.

What will the proposed severance tax increase do for your company? If it passes, do you see it slowing down the drilling in the state?